How legit are most multi-level marketing schemes?

FRIDAY, FEB. 24: Some years ago I was invited by a friend to go with her to a “presentation”. I initially declined but eventually I was pressured into attending. It started out as quite a little social get together with light refreshments and small talk. Then the “presentation” began – there was a snazzy PowerPoint presentation to start and then the spiel from our host about how he made quite a bit of money off of this amazing product.

I suspected right away that this was a multi-level marketing programme or pyramid scheme and as with most things that sound too good to be true, it was. But I was surprised at the amount of people who got involved with this scheme only to later realize that there was no money to be made.

It has been a while since Bermuda has seen an influx of multi-level marketing schemes but it does appear that they are back and during this rough economy locals are being enticed to participate in hopes of making quick and easy money.

Beware! Most multi-level marketing or pyramid schemes will inevitably leave you empty handed

What is a multi-level marketing scheme? On the surface it appears to be an attractive business opportunity to involve your network of friends and family, sell products and make a lot of money. You have the support of a multi-level marketing company who supplies the product, with marketing support and sometimes training. They will not call themselves a multi-level marketing scheme and some do not actually sell a product or service, they may just offer an investment opportunity.

Most multi-level marketing businesses offer a plan that claims that you will receive commissions by selling their product as well as commissions on the sales of people you recruit.

Typically, you sign up, send money for the product or business package and your recruits do the same and their recruits do the same. Everyone is sending the multi-level marketing company money to be a member.

The whole scheme depends on you recruiting people to distribute the product and of course the people you recruit must recruit and on and on it goes. Not all multi-level marketing schemes are fraudulent. A legit multi-level marketing business is designed to move product through a large distribution network.

If you are considering joining a multi-level marketing business, do your research. As with any business venture, investigate the business and its products first. Get as much information as you can, including copies of their sales literature, business plan and/or marketing plan. There is a ton of information on the Internet, use it to your advantage.

Talk to other people who have experience with the multi-level marketing company and the products, to determine whether the products are actually being sold and whether they are making good money.

If the plan is designed so that your income is derived solely from signing up people, in other words you receive a commission on your new recruits rather than selling the product, it is likely fraudulent and a pyramid scheme and you will be wasting your time and more importantly throwing away your money. The odds of actually making money in these schemes are about the same as winning the lottery.

Fraudulent multi-level marketing schemes and/or pyramid schemes are designed so that those at the top continue to make money off of a continuous influx of new investors. Imagine what happens when the business is unable to recruit new investors. The money stops coming in and the business collapses. The business collapses and all but a very few at the top lose their money.

During this rough economy there are all sorts of scams out there and a lot of people desperate to make a quick buck. Don’t fall prey to false promises of riches through multi-level marketing or pyramid schemes. One very important thing to consider, most of these schemes are operated from overseas. For us here in Bermuda, if things go wrong there is very little recourse. How will you find the people who are responsible for your financial losses?

And as for locals who are operating these schemes, remember, under the Consumer Protection Act 1999, it is illegal to operate a pyramid scheme in Bermuda (it is an unconscionable act) and a violation of this Act carries a $15,000 fine and/or imprisonment for up to 12 months.

Honey Adams is the education officer for the Department of Consumer Affairs.